• Mondi will report H1 22E results on 4 August: Including Russia, we expect EBITDA of EUR 1.122mn (Q1 22A: EUR 574mn & Q2 22E: EUR 548mn), driving underlying EPS of EUR 1.34/share (+89% y/y & +61% h/h) and DPS of EUr 23/share (+13% y/y). We expect the balance sheet to strengthen further with net debt of EUR 1,792mn and net debt/EBITDA of 0.9x.
  • Key themes from European peer results: European peers have been reporting record results in terms of revenue and EBITDA in Q2 22A, with strong expansion in margins relative to FY 21A. This has largely been driven by strong demand and pricing momentum more than mitigating significant cost inflation (energy, chemicals, fibre, and logistics). This has seen the sector de-gear and ROCE’s seeing double digit expansion. We believe there is upside risk to earnings for Mondi.
  • Mondi’s share price has held up well vs. peers given its Russian exposure: YTD, the Mondi share price is down 19%. This compares favourably to its closest peers, who have limited Russian exposure (<5% of earnings). DS Smith is down 26%, while Smurfit Kappa is down 28%. The Navigator Company has bucked this trend and is up 17% given its focus on UWF.
  • Sector valuations undemanding: Apart from Navigator, European peers are trading at a discount to their 5-yr average forward EV/EBITDA (x). Sappi continues to trade at the deepest discount (-39%), followed by DS Smith (-25%) and Mondi (-22%).
  • Positive read-though from containerboard and box producers’ results (DS Smith, Smurfit Kappa, Stora Enso, SCA): Demand has remained strong, with containerboard operating rates above 95%. Supply disturbances drove an increase in containerboard inventory days, and European box demand has stabilized on a high level. Despite testliner prices starting to show signs of weakness as Europe enters a seasonally slower season for corrugated box demand (will necessitate some downtime from higher cost producers), producers see a stable outlook for the kraftliner market supported by good demand and normal stocks. OCC and energy prices will drive the direction of testliner prices and accordingly kraftliner prices. Most producers remain bullish despite macro uncertainty and expect low single corrugated demand growth, with further box price increases to be realised.
  • European sack kraft paper producers have printed strong results (Nordic Paper, Billerud), with EBITDA margins in the range of 22-36%: The outlook for the rest of FY 22E is bullish, with the expectation of a continuation of strong market conditions (visibility into the order book for the next 4-5 months) and further price increases (+7% q/q in Q3). With Russian volumes exiting Europe, this has strengthened the position of European producers (Mondi is the leading European sack paper producer). To date, increased competition from Russia has not been seen in sack paper markets outside of Europe.
  • Positive UWF read-though from Navigator’s record Q2 22A results: Revenue +74% y/y and +32% q/q; EBITDA +179% y/y and +83% q/q. This resulted in the EBITDA margin expanding to a staggering 34.3% in the quarter (+1,291bps y/y and +961bps q/q). UWF sales volumes improved by 12% y/y and by 24% q/q to 407kt. Navigator achieved the strongest order book ever of around 90 days (+82% higher than competitors in June). H2 has started with the European industry´s order books at high levels due to paper scarcity.
  • Despite sanctions on Russia, Mondi’s Russian business is likely to have a strong year: All else equal, a 1% strengthening in the RUB equates to a EUR 2.0-2.5mn increase in EBITDA. The EUR/RUB averaged 86.60 in FY 21A. The RUB drove a FX headwind in Q1 22A (average: 99.58), while Q2 22E benefitted from RUB strength (average: 72.18). Rouble strength is likely to see earnings and cash flows from Russia surprise to the upside this year (spot is currently 62.89). We currently estimate EBITDA of EUR 499mn in FY 22E (consensus EUR 295mn).
  • Balance sheet has significant optionality following the Personal Care Components (PCC) disposal. A special dividend of up to EUR 3/share (16% yield) would still provide the balance with significant headroom, in our view: Our base case implies a net debt/EBITDA of 0.4x at the end of FY 22E. Assuming a special dividend range of EUR 1-3/share, this would increase net debt/EBITDA in the range of 0.6-1.0x.
  • We value Mondi excluding earnings from Russia and adjust for proceeds from the PCC disposal: Using a SoTP EV/EBITDA (x), we set a TP of ZAR 355/share. This implies Mondi is trading on a 1-yr rolled EV/EBITDA of 5.6x, a 24% discount to its 5-yr average forward. If we exclude EBITDA from Russia, Mondi’s implied EV/EBITDA is then 7.1x.

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